Monday, August 13, 2018

We are in a very peculiar ideological and political place in which Democracy (oh sainted Democracy) is a very good thing, unless the voters reject the technocrat class's leadership. Then the velvet gloves come off. From the perspective of the elites and their technocrat apparatchiks, elections have only one purpose: to rubberstamp their leadership.

As a general rule, this is easily managed by spending hundreds of millions of dollars on advertising and bribes to the cartels and insider fiefdoms who pony up most of the cash.

This is why incumbents win the vast majority of elections. Once in power, they issue the bribes and payoffs needed to guarantee funding next election cycle.

The occasional incumbent who is voted out of office made one of two mistakes:

1. He/she showed a very troubling bit of independence from the technocrat status quo, so a more orthodox candidate is selected to eliminate him/her.

2. The incumbent forgot to put on a charade of "listening to my constituency" etc.

If restive voters can't be bamboozled into passively supporting the technocrat status quo with the usual propaganda, divide and conquer is the preferred strategy. Only voting for the technocrat class (of any party, it doesn't really matter) will save us from the evil Other: Deplorables, socialists, commies, fascists, etc.

In extreme cases where the masses confound the status quo by voting against the technocrat class (i.e. against globalization, financialization, Empire), then the elites/technocrats will punish them with austerity or a managed recession.The technocrat's core ideology boils down to this:

1. The masses are dangerously incapable of making wise decisions about anything, so we have to persuade them to do our bidding. Any dissent will be punished, marginalized, censored or shut down under some pretext of "protecting the public" or violation of some open-ended statute.

2. To insure this happy outcome, we must use all the powers of propaganda, up to and including rigged statistics, bogus "facts" (official fake news can't be fake news, etc.), divide and conquer, fear-mongering, misdirection and so on.

3. We must relentlessly centralize all power, wealth and authority so the masses have no escape or independence left to threaten us. We must control everything, for their own good of course.

4. Globalization must be presented not as a gargantuan fraud that has stripmined the planet and its inhabitants, but as the sole wellspring of endless, permanent prosperity.

5. If the masses refuse to rubberstamp our leadership, they will be punished and told the source of their punishment is their rejection of globalization, financialization and Empire.

Technocrats rule the world, East and West alike. My two favorite charts of the outcome of technocrats running things to suit their elite masters are:

The state-cartel-crony-capitalist version: the top .1% skim the vast majority of the gains in income and wealth. Globalization, financialization and Empire sure do rack up impressive gains. Too bad they're concentrated in the top 1.%.

The state-crony-socialist version: the currency is destroyed, impoverishing everyone but the top .1% who transferred their wealth to Miami, London and Zurich long ago. Hmm, do you discern a pattern here in the elite-technocrat regime?

Ideology is just a cover you slip over the machine to mask what's really going on.

Friday, August 10, 2018

When the Soviet regime exiled Sakharov in 1980, everybody assumed the USSR was permanent and impregnable to collapse.

There are many ironies in the RussiaGate drama, but none greater than this: The U.S. becomes more like the former U.S.S.R. every day. Longtime correspondent Bart D. sketches out the irony:

I look at the US economy and what I see in actual everyday life is that corrupted capitalism has resulted in the same problems for average citizens as what crony communism did for the citizens of the USSR.

Poor consumer choice. Poor resource allocation. Poor quality consumer products. Poor environmental management/outcomes. Hyper-vigilance and hyper-control of Government over its people. Dodgy Utilities. The difference is that the Soviet Union had a better healthcare system than USA currently has and better housing availability for common people.

How’s the irony! Capitalism and Communism ultimately end up with similar outcomes and for the same reason: Cartel behaviours and cronyism.

Exactly. When the system is rigged to benefit insiders, cartels, cronies and elites at the expense of the many "outsiders," the status quo must mask this reality with propaganda and Big Lies: that is, keep repeating the lie until people believe it due to its embrace by "experts" and authorities.

Case in point: inflation. The masses consuming the mainstream media apparently accept the Big Lie that inflation (i.e. loss of purchasing power of our money) is 2%, i.e. near zero.

But the reality is quite different: stagnant wages + soaring real-world inflation = lower standards of living, which is precisely what the bottom 80% of American households have been experiencing for the past decade of "growth" and "recovery."

The citizens of the old Soviet regime had a wry saying: they pretend to pay us and we pretend to work. I propose a variation for the hapless US citizenry:

They pretend inflation is low and we pretend to be prosperous.

The current clampdown on social media and alternative media in America is ripped right from the playbook of the Soviet regime. We must "protect" you from "fake news," lest you start questioning the official narratives of strong growth, prosperity, low inflation, etc.

Then there's the case of Julian Assange, in exile for releasing what everyone concedes is factual evidence on par with The Pentagon Papers in the 1970s which blew up the false (but convenient to the elites) narratives of the Vietnam War.

They can't paint Assange with the "fake news" brush, so they exile him just as the old Soviet regime exiled Andrei Sakharov in 1980, a hero of the Soviet Union and laureate of the Nobel Peace Prize in 1975.

Please note that the Soviet Union collapsed a decade after exiling Sakharov.Ramping up repression and official propaganda, strangling dissent and marginalizing independent skeptics are the desperate, last-ditch tactics of a doomed regime that only serves the interests of insiders and elites.

There are many pathways to collapse, with financial collapse being a favorite of regimes that print/borrow immense sums to buy off their populace and enrich the insiders/elites-- for example, Venezuela:

When the Soviet regime exiled Sakharov in 1980, everybody assumed the USSR was permanent and impregnable to collapse. In other words, "it can't happen here." But it did happen, and believing "it can't happen here" did nothing but hasten the collapse.

Tuesday, August 07, 2018

Consider how a "balanced portfolio" yielding "balanced returns" worked out for middle class retirees in Venezuela.

The fantasy that a "balanced portfolio" yielding "balanced returns" will fund a stable retirement for decades to come is widely accepted as a sure thing:inflation will stay near-zero essentially forever, assets such as stocks and bonds will continue yielding hefty income and capital gains, and all the individual or fund needs to do is maintain a "balanced portfolio" of various asset classes that yield "balanced returns," i.e. some safe "value" lower-yield returns and some higher risk "growth" returns.

This fantasy is based on the belief that yields will exceed real inflation for decades to come. That is, if inflation is 2%, and the average yield of a "balanced portfolio" is 6%, then the inflation-adjusted return is 4% annually--not great, but enough to secure retirement income.

What few dare ask is: what happens if inflation is 7% and yields drop to 2%?Then the retirement fund loses 5% of its purchasing power every year. In a decade, the fund's value will decline by roughly half.

Oops. Analysts such as John Hussman have been pointing out that historically, eras of outsized returns such as the past decade are followed by eras of low or even negative returns. So assuming a "balanced portfolio" of corporate and sovereign bonds, growth stocks, index funds, etc. will yield 6% to 7% like clockwork is essentially betting that this time is different: high growth will never pause or reverse.

But let's say things really unravel, and inflation is 8% and yields are negative 2% for a few years. Retirement funds will lose 10% of their purchasing power every year. In a few years, the fund will lose half its value.

What happens if the current "everything" asset bubble pops, and inflation starts running away from policy makers? It's worth recalling that declines on the order of 75% to 80% are common when bubbles finally pop--for example, the NASDAQ stock index post-2000.

If inflation (i.e. the currency loses purchasing power) gets out of hand due to excessive money creation to fund interest on debt, entitlements and obligations, the only cure is to raise interest rates significantly. Higher rates destroy the value of existing bonds and they strangle speculation and debt-dependent projects and spending.

Higher rates means corporations, governments and households must pay more each month in interest, leaving less income for spending and investment.Unfortunately, the global economy is largely dependent on rapidly expanding debt for its survival. As this chart shows, the tiny reduction in debt expansion in 2008-09 very nearly collapsed the global financial system.

Only the conjuring of $20 trillion out of thin air by central banks saved the day and the decade.

Counting on endless real returns of 5% or more essentially forever is embracing a fantasy. Never mind what asset mix is considered "balanced"-- bubbles pop, and when the "everything" bubble pops, it means stocks, bonds and real estate will all experience significant declines, and if history is any guide catastrophic declines in some asset classes.

That central banks and governments can create endless mountains of new money to fund soaring obligations without triggering a decline in purchasing power is also a fantasy. As I've explained in the past, it seems like central banks have created a financial perpetual motion machine: the government borrows $1 trillion to fund obligations, and the central bank "prints" $1 trillion and buys the government debt.

It seems so painless and perfect--who cares if the central bank balance sheet balloons to $100 trillion? We owe it to ourselves, the government can't go broke since it can always print more money, etc.

The grim reality is printing trillions and pumping that newly issued currency into a stagnant, dysfunctional economy reduces the purchasing power of the currency, i.e. inflation. To use a health analogy, we've been gorging on doughnuts, pizza and beer for a decade, and since we're still apparently disease free, we assume we can keep enjoying this diet for decades to come.

The consequences of systemic sclerosis are non-linear, meaning they pile up unseen until the major organs give out and the apparently disease free individual collapses in a heap.

Consider how a "balanced portfolio" yielding "balanced returns" worked out for middle class retirees in Venezuela:

Sunday, August 05, 2018

The only way to pay all these future obligations is by creating new money.

I've been focusing on inflation, which is more properly understood as the loss of purchasing power of a currency, which when taken to extremes destroys the currency and the wealth/income of everyone forced to use that currency.

The funny thing about the loss of a currency's purchasing power is that it wipes out every holder of that currency, rich and not-so-rich alike. There are a few basics we need to cover first to understand how soaring future obligations--pensions, healthcare, entitlements, interest on debt, etc.--lead to a feedback loop which will hasten the loss of purchasing power of our currency, the US dollar.

1. As I have explained many times, the only possible output of the way we create and distribute "money" (credit and currency) is soaring wealth/income inequality, as all the new money flows to the wealthy, who use the "cheap" money from central and private banks to lend at high rates of interest to debt-serfs, buy back corporate shares or buy up income-producing assets.

The net result is whatever actual "growth" has occurred (removing the illusory growth that accounts for much of the GDP "growth" this decade) has flowed almost exclusively to the top of the wealth-power pyramid (see chart below).

The mainstream financial media swallows the bogus "growth" story without question because that story is the linchpin of the entire status quo: if it's revealed as inaccurate, i.e. statistical sleight of hand, the whole idea that "growth" can effortlessly fund all future obligations goes up in flames.

Combine that "growth" has been grossly over-estimated with an increasing concentration of wealth and income in the top .1% of 1%, and the only possible conclusion is there's less available to pay fast-rising obligations out of what's left to the bottom 99.9%.

3. We've been paying our obligations with debt for the past decade. Look at the chart below of the debt to GDP ratio--it has skyrocketed as GDP has inched higher while debt has exploded. (Remove the fictitious "growth" in GDP and the picture worsens significantly.)

Look at the chart of federal debt and explain how the steepening trajectory of debt is sustainable in a stagnating real economy with stagnating wages for the bottom 95% of the populace.

4. Recall that the federal, state and local governments pay interest on all the money they borrow to fund deficit spending, i.e. every dollar spent above and beyond tax revenues. All that interest is an increasing obligation that must be paid in the future. Borrowing more to pay interest increases the interest payments due in the future--a classic self-reinforcing runaway feedback loop.

5. Politicians get re-elected by increasing entitlements and obligations without regard to how they will be funded. "Growth" will effortlessly take care of everything--that's the centerpiece assumption of all conventional economics, free-market, Keynesian and socialist alike.

6. The core constituencies of politicians are government employees and contractors, as these interest groups are funded by the government, which is nominally managed by elected officials and their appointees. Nobody's more generous (or demanding) than those feeding directly at the government trough. (By "contractors" I mean the vast array of Corporate America cartels that feed off government spending: defense, Big Pharma, Higher Education, etc.)

7. The obligations that have been promised are expanding at a nearly exponential rate, as healthcare costs continue to soar and the number of government pensioners is rising rapidly. This chart illustrates the basic dynamic: the tax revenues required to fund these obligations are far outstripping the income and wealth of the bottom 95% of the populace.

Consider this chart of real GDP per capita, i.e. per person. Real GDP is adjusted to remove inflation from the picture, so this is supposed to be "real growth." How many people are demonstrably 19% better off than they were in 2000?

Not many, judging by the decline in family financial wealth since 2001:

Income increases flow disproportionately to the top .1%. Adjusted for real-world inflation, the bottom 95% have actually lost ground:

Here's the uncomfortable reality: the means to pay all these future obligations-- the real-world economy, and the wealth and income of the vast majority of the populace-- are far too modest to fund the fast-expanding obligations,which include interest due on the ever-increasing mountain of public and private debt.

The current "everything" asset bubbles have temporarily boosted the wealth and income of corporations and the wealthy, but all bubbles eventually pop as the marginal elements that are propping up the expansion weaken and implode.

Once the asset bubbles pop, the illusion that "taxing the rich" will pay for all the obligations pops along with the bubble. And as I've noted many times, those at the top of the wealth-power pyramid wield political power, so they have the means and the motive to limit their tax burden to roughly 20% or less--(sometimes much less, as in zero.)

That 20% is an interesting threshold, as once federal tax burdens rise above 20%, the higher taxes trigger a recession which then crushes tax revenues.This makes sense-- if I pay an extra $2,000 annually in higher junk fees and taxes, that's $2,000 less I have to invest or spend.

Put these dynamics together and you get one outcome: the federal government cannot possibly pay all its obligations out of tax revenues nor can it raise taxes high enough to do so without gutting tax revenues via a recession.

The only way to pay all these future obligation is by creating new money, which in a stagnant, dysfunctional economy can only reduce the purchasing power of the currency, in effect robbing every holder of the currency of wealth and income.

Here's the end-game, folks: Venezuela. The nostrum has it that "the government can't go broke because it can always print more money." True, but as the wretched populace of Venezuela has discovered, there is a consequence of that money-creation to meet obligations: the destruction of the currency, and thus the wealth and income of everyone forced to use that currency.

Friday, August 03, 2018

One of the enduring mysteries of the past decade is why inflation has remained tame while the central bank and government have pumped trillions of dollars of newly created money into the economy. Millions of words have been written about this, and so some shortcuts will have to be taken to make sense of it in one essay.

Let's start with the basics.

1. Adding newly created money but not generating new goods and services of the same value reduces the purchasing power of existing money. To keep it simple: say the economy of a country is $20 trillion. (Hey, the US GDP is $20 trillion...) Say its money supply is $10 trillion.

So banks and/or the government create $2 trillion in new money but the value of goods and services only expands by $1 trillion. the "extra" $1 trillion of newly created money (either "printed" or borrowed into existence) reduces the value of all existing money.

In effect, the new money robs purchasing power from all existing money.Those holding existing money have lost purchasing power while the recipients of the new money receive purchasing power they didn't have prior to receiving the new money.

We can see how this works by looking at a chart of GDP to debt. As debt has soared (and remember, debt is "new money" that was loaned into existence), GDP has risen at a much lower rate, so the ratio of debt to GDP has skyrocketed. (see chart below)

2. Where "inflation" (higher prices for the same item) shows up depends on who gets the newly created money: the wealthy few or the wage-earning many. As I have explained many times, in our system, all newly issued money goes to banks, financiers and corporations--the super-wealthy few.

So what do already-wealthy people and companies do with trillions in new money? They buy assets--stocks and bonds and real estate. Wage earners who receive new money tend to save some of it but they also spend some of it. The super-wealthy and corporations already own more stuff than they know what to do with, so they spend the new money on income producing assets or stock buybacks.

The net result of giving all the new money to the wealthy is the inflation of an asset bubble, which is precisely what's happened in the past decade. Real estate: bubble. Corporate debt: bubble. Stocks: bubble. We can see this bubble by comparing the value of the stock market to the real economy (as measured by GDP): the higher the ratio of stocks to GDP, the greater the bubble.

Look at the chart below. The current stock market bubble is the greatest in history, exceeded only by the insanity of the last few months of the dot-com bubble, when companies with very little revenue and zero profits were valued in the billions of dollars.

Stocks are in a bubble, period. This is the inevitable result of shoveling all the new money into the hands of the wealthy and corporations. Real-world inflation is certainly higher than official inflation, but the real inflation (higher prices for the same item) is in assets, which have tripled or quadrupled in a mere decade.

3. The inevitable consequence of asset inflation is rising income and wealth inequality. The wealthy few have gorged on assets with all the newly issued credit-money, and as the assets soared in value, they've become immensely wealthier.

A funny thing happens on the way to extremes of wealth/income inequality: social unrest, disorder, revolt. The lackeys and apologists that serve the interests of the wealthy few label this "populism," but it's really just the inevitable response to extremes of wealth/income inequality generated by funneling trillions in new credit-money to the wealthy few at the expense of wage-earners and holders of existing money.

4. To quell the revolt of the many, the Powers That Be will create trillions in new money and helicopter-drop it to the masses. This mass distribution of newly created money (borrowed into existence by the central bank and/or government) will flow into the real-world economy, not assets, and so the inflation (higher prices for the same item) will manifest in good and services.

This helicopter drop of newly created money will be called pensions, Universal Basic Income, tax subsidies, negative tax rates, etc. There are a lot of names for distributing newly created money that's been borrowed into existence.

This is precisely what Venezuela has been doing for a decade: distributing newly created money that isn't matched by a corresponding increase in the production of goods and services. And as we know, the result of this has been the complete destruction of the purchasing power of Venezuela's money.

"That can't happen here" is just what the Venezuelans thought five years ago.But really, it boils down to math: creating money out of thin air and pumping it into a dysfunctional economy destroys the purchasing power of the existing money. Those receiving the new money are like a snake eating its own tail.

Real-world inflation will blow the doors off every forecast of low inflation forever. From the point of view of the wealthy few who control the status quo in the US, they have a stark choice: either continue pushing wealth/income inequality to extremes that trigger social and political revolt, which puts their control at risk, or create and distribute trillions in "free money."

They know this generates inflation, but the increases in the value of their assets have always far outstripped real-world inflation, so they don't care about inflation. That's for little people to worry about.

But what the wealthy few are forgetting is rip-roaring inflation destroys the system just as surely as wealth/income inequality. Just ask the Venezuelans how effective creating new money has been in terms of eliminating poverty: now their entire populace is impoverished, with the only exceptions being the wealthy few in control of the status quo.

The stability of America's status quo is illusory.Can't happen here is going to ring mighty hollow in five years.

Nothing to see here, move along. So what if debt has blown past GDP?

Rising stock valuations are good for America--or at least good for the few who own most of the stocks. Never mind this is the second-greatest bubble in history; stocks can never go down, volatility is low, the Fed has our backs, profits have never been higher, etc.

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